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Implementing Inflation Targeting in Brazil: An Institutional Analysis

By Eduardo Strachman | October 17, 2005

Excerpt from the Intro: In the New Consensus view, Central Banks (CBs), when following an Inflation Targeting (IT) regime, should direct their monetary policy toward an inflation target quite independently of fiscal policy authorities (Fontana & Palacio-Vera, 2004; Kriesler & Lavoie, 2004). Nevertheless, some of the principal proponents of IT stress that wise CBs must always consider future fiscal and output consequences of their monetary policies (Bernanke et al., 1999; Blanchard, 2004).

We agree with these critics against the separation of monetary and fiscal policies—something formally inevitable following the current mainstream obsession with CB independence, in reality a corollary of the IT proposition—for this divorce of monetary and fiscal policies affect the performance and costs of economic policies, compared to more concerted ones (Mendonça, 2001; Arestis & Sawyer, 2003). In addition, fiscal policies can be used countercyclically, both theoretically and empirically (as in many countries—and the Scandinavian countries are true examples of that), with faster results and lower costs when compared to monetary policies, for a rise in interests implies in higher costs for all the economy while, for instance, planned and countercyclical changes in government spending have no implications over costs or, at least, circumscribe these implications almost only to certain sectors directly affected. We should also not forget, as Keynes (1936:164) taught us long ago, that in times of low marginal efficiency of capital, a decrease in interest rates may not be enough and/or act more slowly than what is needed to produce an increase in investment, production and employment.

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Read More: Economy, Finance, Tax, Brazil, Americas

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